Sunday, April 18, 2010

A Goldman Opportunity for Reform?

This is the British-based banker known as ‘Fabulous Fab’ charged in America with fraud for allegedly selling toxic mortgage investments deliberately designed to fail in the US housing market crash.

Fabrice Tourre was known for his expensive tastes at Goldman Sachs, the investment bank where investigators allege he sold sub-prime mortgage bond products to customers, who are estimated to have lost more than £645million.

The broker, who earned £1.5million a year, moved to London in 2008 after several years with the firm in New York, where he rented a £3,000-a-month apartment and claimed to be from a prominent French family.

One female acquaintance recalled: ‘I speak French so when we bumped into each other I would talk to him in French. He was a well-mannered, handsome guy [who said] he came from a very refined family.’

Tourre, 31, was known in the fashionable block of flats for throwing noisy parties.

‘He had one big blow-out party just before he moved out,’ the acqaintance said. ‘Some of the neighbours got very annoyed.’

The banker is accused of creating sub-prime mortgage investment deals devised to fail. US investigators claim Goldman Sachs lied to investors – the biggest being identified as as the Royal Bank of Scotland group – to make the mortgages sound like a safer deal. Meanwhile, billionaire hedge fund owner John Paulson made bets on the stock market that the investments would fail – earning an estimated £2billion.

American investors claim Tourre bragged in emails about the scheme. Mr Paulson is not accused of any wrongdoing.

A Wall Street expert who helped to raise the alarm about the alleged fraud said: ‘This is the most cynical scheme I ever saw. Tourre was very aggressive about trying to make the assets look better than they were.

'There’d been a raging bull market and that can cover a lot of sins. You could tell from his emails that this was the kind of kid who was in his element.’

Tourre was admired by colleagues, however, for what they called his ‘goofy sense of humour’. He was popular with clients, wooing them over games of tennis. According to a French social networking website, he has a long-term girlfriend.

The banker was a ‘straight-A’ student at the Lycee Henri IV, one of France’s most prestigious schools, housed in 6th Century abbey in Paris.

He went on to study maths at the Ecole Centrale Paris, one of the top French universities and obtained a master’s degree from Stanford in the US.

In London, his office is in a luxurious building on Fleet Street. A Mail on Sunday reporter who called there yesterday was told by an employee that ‘Mr Tourre is not working’.

When he was contacted on his mobile phone, he hung up and his lawyer did not respond to a request for comment.

US watchdog the Securities and Exchange Commission said a formal request would be made for Tourre to return to the country to face charges.

Tourre is a stereotypical Goldman investment banker - young, bright, polished, ambitious, who is able to "woo" clients off their feet.

But when I read this article, I think to myself what is a 31 year old arrogant adolescent (he was 28 years old when he structured this deal) doing structuring complicated deals? Why does Goldman allow neophytes - basically spoiled kids who think they are financial wizards - to play dangerous games like this? And notice how it's always some guy from France from a "prestigious" school with "exceptional mathematical skills" who is behind these complicated derivatives? Maybe these "top" schools should teach these "geniuses" some basic ethics!

It's sad but I've seen so many of these "financial wizards" come peddle super complicated structures and I always think to myself "who'd be crazy enough to invest in these products?". But there is always a fool - or in this case, underfunded public pension funds looking for yield - who will buy the "sophisticated" marketing crap Goldman and other investment bankers throw their way, totally abdicating their fiduciary duties.

On Friday, like millions of others, I received an email from President Obama telling me the time is right for financial reform. The timing of this email couldn't have been more perfect. In fact, it all seems orchestrated to me.

I have been speaking about the proliferation of induced bankruptcies due to the relatively new credit default swap market and the spike in private equity Leveraged Buy Out (LBO) acquisitions of major corporations. The Standard and Poors Annual Global Corporate Default Survey 2009 released on March 17, 2010 shows that a dramatic spike in bankruptcies is occurring throughout the world, especially amongst corporations that are financed by speculative grade = junk bonds.

On April 16, 2010, the U.S. SEC filed civil fraud charges against the world's largest investment bank, Goldman Sachs, for distributing toxic credit products designed to go bankrupt, so that hedge funds owning credit default swaps could make hundreds of million dollar profits from these bankruptcies.

How is all this complicated high finance relevant to Nortel disabled employees? The Nortel LTD employees are the victims of a Nortel bankrutpcy, where the CDS hedged junk bond owners are making profit from the bankruptcy. The Nortel junk bond owners are making more profits when the over $100 million missing assets in the Nortel Health and Welfare Trusts are not required to be put back into the trust to pay for the long term health wage loss replacement income and medical benefits of the disabled.

I provide below some of the charts from this new 2009 Standard and Poors corporate default study, that tell a compelling story about how the corporate world has changed: it is relying more on junk bond financing and there are more corporate bankruptcies, as a result (see charts 1,6, 14, 19, and 21 in the S&P report).

The percentage of all corporations that issue bonds, who issue speculative grade bonds has been steadily rising from a low of 24% in 1991 to 40% by 2009, a span of close to twenty years. In my opinon, the spike in the incidence of junk bond financing of corporations coincides with the emergence of the credit default swap market.

The junk bond related CDSs outstanding are about $5.2 trillion compared to total junk bonds outstanding of $2.4 trillion. There is now more than two times the amount of insurance on junk bonds than there are junk bonds outstanding.

Needless to say, with this much junk bond insurance out there, the demand to buy junk bonds is high due to buyers being able to buy CDS insurance on the junk bonds and then having less concern about these very high risk junk bonds going into bankruptcy default. The CDS insurance contributes to a higher incidence of corporation bankrutpcies, because credit events, like bankruptcy filings, trigger CDS insurance payments. Lots of CDS speculators, owning a small amount of the junk bonds or not owning the junk bonds at all, are happy to see the junk bond financed corporations fail, since they can make profits on these bankruptcies.

The proliferation of bankruptcies induced by CDS's (and also private equity LBO acquisitions) make it essential that there be Canadian bankruptcy law amendments to protect Canada's most vulnerable citizens, who are the disabled who think their employers provide secure long term disability benefits. When bankruptcies occur, these disabled people are learning the horrible truth about the fine print of their self-insured long term disability plans and the egregious breach of trust going on within their trust accounts.

Senator Art Eggleton's Bill S-216 protects Canada's most vulnerable persons from being placed into poverty by bankruptcies, where large Wall Street and Bay Street banks and hedge funds can make billions of dollars profit. The Canadian disabled need to be removed now from the bankruptcy process driven by these overwhelming negative forces, that our global governments and enforcement agencies are needing to address.

It's infuriating watching banksters get bailouts and bonuses while the disabled get screwed. And don't hold your breath on any meaningful financial reform. I know, I am a cynical bastard, but the banksters control the US government, just like they control the Canadian government. It's all smoke & mirrors to appease the masses who are waking up to the fact that the greatest wealth transfer in the history of mankind continues totally unabated.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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